BSP Urged to Maintain Hawkish Stance on Inflation, Warned Against Premature Easing

The Bangko Sentral ng Pilipinas (BSP) should remain committed to taming inflation and must resist calls to prematurely end its interest rate-hiking cycle for the sake of the struggling economy, New York-based think tank GlobalSource Partners said. It added that markets are looking for “stronger forward guidance” from policymakers. READ: BSP raises policy rate to 5%; peso sinks to new low In a commentary, Diwa Guinigundo, analyst at GlobalSource, said the peso’s slide to the 62-per-dollar level despite the central bank’s recent quarter-point rate hike could indicate that “the market did not seem fully convinced that the BSP had signaled an unambiguous commitment to staying on top of inflation.” Guinigundo, a former central bank deputy governor, said the real interest rates—or the actual cost of financing after factoring in inflation—remain negative despite the BSP’s tightening actions that have lifted its key rate to 5 percent, as inflation remained above 6 percent as of July. This, he said, raises the question of whether the BSP has done enough to fight inflation. “The issue is not simply whether the BSP should raise, hold or eventually cut its policy rate,” Guinigundo said. “The more fundamental question is whether monetary policy is sufficiently restrictive in real terms to bring inflation back to target and keep expectations firmly anchored.” Since the start of the BSP’s anti-inflation campaign in April, policymakers have raised the policy rate guiding bank lending costs by a total of 75 basis points. BSP Governor Eli Remolona Jr. said that last week’s rate hike was a “preemptive” response to emerging risks from a severe El Niño episode and possible wage hikes. Policymakers now expect inflation to average 6.1 percent this year—down from the prior estimate of 6.4 percent but still above the BSP’s 3-percent target—while raising the 2027 outlook to 5.4 percent from 4.5 percent before. READ: BSP chief: Further rate cuts won’t be too useful On the growth side, the BSP said the economic fundamentals “appear to be intact” over the medium term, adding that a recovery in government spending could help stimulate activity in the second half of the year. The economy expanded just 2.6 percent in the first half amid the war-driven oil shock. Looking ahead, Guinigundo said the October policy meeting would be an important test for the BSP, adding that the central bank should resist the temptation to declare the tightening cycle effectively finished simply because growth is weak. Other authorities—not the BSP—must deal with the structural and supply-side impediments to growth, he stressed. “This is not an argument for indiscriminate tightening or for ignoring growth. It is an argument for recognizing the hierarchy of responsibilities,” he said. “Asking monetary policy to compensate for weaknesses elsewhere risks creating the worst of both worlds: weak growth and persistent inflation.” INQ